Philippines Tries to Help Its Currency

By WAYNE ARNOLD

Published: August 29, 2003

With concerns about growing political instability sending the country's currency to new depths, the Philippines central bank yesterday heeded a call by President Gloria Macapagal Arroyo to ''crack the whip'' against currency speculators and raised crucial interest rates.

Cracking the whip, in this case, came not in the form of raising rates charged to commercial banks to borrow money but rather raising the rates the banks are paid to keep money at the central bank. The central bank had been using a tiering system: the more a bank deposited, the less it earned in interest. Yesterday, the central bank scrapped that system and said that it would now pay a flat 6.75 percent -- the rate had ranged from 1 percent to 4 percent -- thereby encouraging banks to keep more money in the central bank rather than lending it out or using it to buy dollars.

The central bank governor, Rafael Buenaventura, said the move was intended to stave off the potential inflationary effects of the peso's decline. The Philippine peso closed Tuesday at a record low of 55.45 to the dollar. (The peso strengthened yesterday to 54.93.) Inflation, meanwhile, has been hovering at an annual rate of about 3 percent, well below the government's target of 4.5 percent to 5.5 percent.

''Clearly we will probably be well within our targets this year, but we took extra caution because of the volatility of the exchange rate,'' Mr. Buenaventura said in a telephone interview.

Some analysts warned that the bank's move may have little effect given the uncertain climate that prevails in Manila. ''The peso is falling because of political security concerns,'' said Spencer Yap, head of research at BPI Securities in Manila.

A mutiny late last month by members of the armed forces and accusations of corruption against Mrs. Arroyo's husband are part of what investors fear presages a period of increasing political turmoil ahead of presidential elections next year. Taken together with fears of terrorist attacks by Islamic militants, Manila has become a city on edge.

''I don't think they can win this battle until the political situation stabilizes,'' said Jan Lambregts, head of research at Rabobank in Singapore. In the meantime, defending the peso with higher rates is pointless, he said, because ''it will harm the economy.''

Data on the economy released yesterday illustrated the risk that Mr. Buenaventura was taking. The economy grew 3.2 percent in the second quarter compared with the quarter last year -- a modest tempo for the Philippines -- as dry weather hurt agricultural output.

But Mr. Buenaventura said the bank's move was one of the most subtle monetary tools at its disposal, and that it was unlikely to be a drag on the economy by translating into higher lending rates by commercial banks. For example, the central bank did not, he said, raise the amount of deposits it requires banks to set aside and not lend. ''It's more symbolic than anything else,'' he said of yesterday's move.

Currency reserves, which in other countries are used to intervene in the foreign exchange markets, are mostly pledged to meet debt payments in the Philippines.

Other analysts said Mr. Buenaventura was right to step in to defend the peso. Letting the currency slide would only invite further selling by speculators, wrote Philip Wee, markets strategist at DBS Bank in Singapore, in a report issued before the central bank's decision was announced.

A falling peso might benefit Philippine exports, but it also makes it more expensive for the government to pay its dollar-denominated debts, worsening its budget deficit. In addition, some of the country's manufactured exports are made of imported components, whose prices rise as the peso weakens.

The country has also been struggling to crack down on tax evasion, hoping to rein in the budget deficit. In July, the government managed to keep the deficit within its target for a fourth consecutive month, after posting a record $3.84 billion shortfall last year.

The sinking peso, and the political concerns driving it lower, also compel investors to charge the Philippines more to borrow despite its improving fiscal discipline. The government rejected bids for five-year note last week that asked for yields of 10.45 percent, higher than the 9.75 percent bid at the previous auction. Mr. Buenaventura said the bank was not acting on orders from Mrs. Arroyo, but he said that she and the bank shared common interests when it came to the currency.

''Let's put it this way,'' he said, ''it's in the national interest to make sure the peso is kept stable.''

Mr. Buenaventura has been thrust into his own role in Manila's unfolding political drama. A court in Manila suspended him for a year without pay last month for ''gross neglect of duty'' during the closing of a troubled local bank three years ago. Mr. Buenaventura is allowed to continue serving as governor while he appeals the ruling, a process that could conceivably stretch beyond the end of his term in June 2005.

Mr. Buenaventura returned to the Philippines on Wednesday after a two-week trip to the United States, vowing to fight the court ruling.